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Ujjivan Small Finance Bank’s gross non-performing assets (GNPAs) declined to 4.99% of the loan book in September quarter from 6.16% in the last quarter.
Ujjivan Small Finance Bank’s gross non-performing assets (GNPAs) declined to 4.99% of the loan book in September quarter from 6.16% in the last quarter.

Ujjivan Small Finance Bank needs a growth fix as collections normalise

  • What should also please investors is that Ujjivan Small Finance Bank has reduced its operating expenses in a big way. Its cost-to-income ratio dropped to 56.6% in the September quarter from 69.5% a year ago

Mumbai: Ujjivan Small Finance Bank investors can count their blessings after September quarter showed improvement in the lender's profitability.

The lender reported a 4% growth in net profit for the quarter and its core interest income grew by a healthy 21%. Considering the bank caters to the more vulnerable small borrowers, an improvement in repayment collections shows that this segment too is bouncing back slowly. Small borrowers and businesses are the most hit by the pandemic and the progressive unlocking of the economy since June has meant these firms are slowly returning to normalcy.

Ergo, small finance banks such as Ujjivan Small Finance Bank are witnessing an increase in their collection efficiencies. The lender managed to collect repayments from 91% of its borrowers in the September quarter. In a call for analysts on Saturday, the bank’s management said that collections would improve further in coming months.

Ever since the microfinance turned into a small finance bank in September 2017, the share of micro loans in its portfolio has reduced to 76% now. While collections in micro loans improved to 88% in the September quarter, non-micro loans showed stronger metrics.

The trajectory of improved repayments augurs well for asset quality which in turn would mean lower provisions and higher profitability. Investors have rewarded the bank, visible in the near 3% rise in the share price today.

What should also please investors is that Ujjivan Small Finance Bank has reduced its operating expenses in a big way. Its cost-to-income ratio dropped to 56.6% in the September quarter from 69.5% a year ago. The management has said that much of this reduction is structural and persistent. This is good news on the profitability front.

That said, the bank made 100 crore additional provisions towards covid-19 related risks, a sign that it foresees trouble ahead. Indeed, microfinance book is still vulnerable with collections at 88% being lower than the total portfolio.

Also there is a sore spot as far as growth is concerned. Loan growth is still weak as disbursements are just half of levels seen before the pandemic. While more and more borrowers are coming back to their repayment discipline, the bank is not getting new customers as fast as they were before. What’s more is much of the new disbursements during the September quarter were to existing customers.

Ujjivan Small Finance Bank has delivered on asset quality and it has also surprised positively in curtailing operating expenses. But the lender needs to show a return to pre-covid growth rates for valuations to scale up.

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